TransAlta Corporation (TAC) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A reveal several positive aspects: a strategic partnership with Nova Clean Energy, a strong financial position with a $450 million green note offering, and an 8% dividend increase. The company is also confident in its 2025 EBITDA and free cash flow guidance. However, there are concerns about project timelines and management's evasive responses in the Q&A, which slightly temper the overall sentiment. The market cap suggests moderate sensitivity to these factors, leading to a 'Positive' rating.

Key Financial Performance

Adjusted EBITDA $349 million, which was $33 million higher than the second quarter of 2024 due to favorable ancillary service pricing, the use of environmental and tax attributes in Alberta, and the optimization of assets to capture price volatility in Alberta and at the Centralia site in Washington State.

Free Cash Flow $177 million or $0.60 per share, in line with the same period last year. Higher adjusted EBITDA was offset by higher sustaining capital expenditures in the gas fleet during the quarter as well as higher net current tax and interest expenses.

Hydro Segment Adjusted EBITDA $126 million, up from $83 million in the second quarter of 2024. This increase was due to higher intercompany sales of emissions credits to the Gas segment to fulfill the 2024 GHG obligation, as well as higher production and ancillary prices.

Wind and Solar Segment Adjusted EBITDA $89 million, in line with the second quarter of 2024. Higher environmental and tax attributes revenue in Alberta was offset by lower tax attributes revenue from Oklahoma assets and lower Alberta power pricing for the merchant wind fleet.

Gas Segment Adjusted EBITDA $128 million, down from $142 million in 2024. The decrease was due to lower realized power prices in Alberta and higher carbon and natural gas pricing, partially offset by the addition of the Heartland and higher quantity of internally generated emissions credits utilized for the 2024 GHG obligation.

Energy Transition Segment Adjusted EBITDA $19 million, a $17 million increase year-over-year due to higher market optimization benefits and higher availability at the Centralia facility, which had an extended turnaround in the second quarter of last year.

Energy Marketing Adjusted EBITDA $26 million, a decrease of $13 million compared to the second quarter of 2024. This was primarily due to comparatively subdued market volatility across North American natural gas and power markets and lower realized settled trades in the quarter.

Corporate Adjusted EBITDA $39 million, in line with the second quarter of 2024. Increased spending to support strategic and growth initiatives and the addition of corporate costs related to the acquisition of Heartland were noted.

Alberta Portfolio Spot Price $40 per megawatt hour, down from $45 per megawatt hour in 2024. The decline was due to incremental generation from new Gas, Wind, and Solar supply in the province as well as benign weather.

Hydro Fleet Realized Merchant Price $82 per megawatt hour, a 105% premium to the average spot price.

Gas Fleet Realized Merchant Price 55% premium to the average spot price.

Merchant Wind Fleet Realized Price $23 per megawatt hour.

Ancillary Service Pricing $42 per megawatt hour, a 5% premium to the average spot price.

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Operating Highlights

Data Center Strategy: Progressing on Alberta data center strategy with commercial negotiations reflecting AESO's approach to large load integration. Demand transmission service contracts expected by mid-September.

Wind Facilities Recontracting: Successfully recontracted Melancthon 1, Melancthon 2, and Wolfe Island wind facilities in Ontario, extending contracts to 2031 and 2034.

Ontario Electricity Market: Rising wholesale electricity prices in Ontario indicate a tightening supply-demand balance, benefiting future recontracting opportunities.

Alberta Market: Engaging with Alberta government and AESO on data center strategy and energy market design, with potential for significant investment and increased load.

Adjusted EBITDA: Achieved $349 million in Q2 2025, $33 million higher than Q2 2024, driven by asset optimization and favorable pricing.

Free Cash Flow: Generated $177 million in Q2 2025, consistent with the previous year despite higher sustaining capital expenditures.

Fleet Availability: Maintained an average fleet availability of 91.6%.

Legacy Thermal Sites: Focusing on repurposing Alberta Thermal and Centralia sites for data centers and coal-to-gas conversion.

M&A Opportunities: Actively pursuing strategic M&A opportunities to diversify portfolio and enhance cash flow stability.

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Risk or Challenges

Market Conditions: Lower realized power prices in Alberta and higher carbon and natural gas pricing negatively impacted the Gas segment's adjusted EBITDA. Additionally, the Alberta portfolio experienced a decline in spot prices due to incremental generation from new Gas, Wind, and Solar supply, as well as benign weather.

Regulatory Hurdles: The company is navigating the Alberta data center strategy and the AESO's approach to large load integration. While progress is being made, the execution of demand transmission service contracts and the establishment of a framework for incremental data center development remain pending.

Supply Chain and Operational Challenges: Higher sustaining capital expenditures in the Gas fleet and increased spending to support strategic and growth initiatives have impacted free cash flow. Additionally, the Energy Marketing segment faced challenges due to subdued market volatility and lower realized settled trades.

Economic Uncertainties: The company is exposed to fluctuations in ancillary service pricing and environmental and tax attributes revenue, which can impact financial performance. Lower Alberta power pricing for the merchant wind fleet also poses a risk.

Strategic Execution Risks: The company is working on re-purposing legacy thermal energy campuses and securing data center customers, but these initiatives are still in progress and subject to successful commercial negotiations and regulatory approvals.

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Guidance & Outlook

Alberta Data Center Strategy: The AESO has commenced work on Phase 2 of its data center strategy, which will establish the framework for incremental data center development in Alberta. Demand transmission service contracts are expected to be executed in mid-September, securing system capacity for proponents, including TransAlta. The company is progressing towards a data center memorandum of understanding and anticipates significant investment and increased load, which will rebalance the current oversupply of generation in the province.

Centralia Site Development: TransAlta is actively engaged in commercial negotiations and targets executing a definitive agreement before year-end. Detailed development plans for the Centralia site are expected to be shared in the coming months.

2025 Guidance: The company remains confident in meeting its 2025 guidance range for adjusted EBITDA and free cash flow.

Alberta Portfolio Hedging: For the balance of 2025, approximately 4,300 gigawatt hours of Alberta generation are hedged at an average price of $69 per megawatt hour, well above the current forward curve of $48 per megawatt hour. For 2026, the hedge position has increased to approximately 7,000 gigawatt hours at an average price of $67 per megawatt hour.

Greenhouse Gas Emissions Reduction: TransAlta remains on track to achieve its ambitious 2026 CO2 emissions reduction target.

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Shareholder Return Plan

Dividends: The company has the ability to return capital to shareholders through dividends.

Share Repurchases: The company has the ability to return capital to shareholders through share repurchases.

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Key Q&A

Q:What are the gating factors to successfully execute an MOU with customers, and is there enough demand to pursue additional capacity?

A:The gating factors include finalizing terms of the MOU, customer work, and adjustments in the AESO's approach to data centers. There are no significant impediments, but it takes time. The company is focused on allocated capacity and subsequent development stages, with no immediate plans for additional capacity.

Q:How is the company approaching midlife natural gas M&A in the U.S. and Canada?

A:The company is increasingly focused on midlife natural gas M&A, targeting core markets like the PAC Northwest, Desert Southwest, and Ontario. They find current asset multiples attractive and prioritize these opportunities due to their energy marketing expertise. They are also selectively exploring renewables.

Q:Has the timeline for securing an MOU changed since the Q1 call, and can Alberta deliver power to gigawatt-scale data centers?

A:The timeline has shifted due to project evolution and AESO's decision delay to mid-September. The company is progressing diligently and expects to advance in an orderly way. Alberta is seen as capable of supporting gigawatt-scale data centers over phases, which would rebalance load and benefit the company's diverse fleet.

Q:How has the project timeline and vision evolved since Q1?

A:The project timeline has shifted due to clarity received from AESO in June about the phase's execution. The company is now working with customers to realize the project and plan subsequent stages. There is no significant deviation, just a need for time to finalize details.

Q:Does the mid-September DTS execution timeline align with the MOU timeline?

A:The DTS execution timeline is separate from the MOU timeline. The company is focused on securing its position with the DTS contract while progressing the MOU on a different timeline.

Q:Is there additional opportunity to engage in PPAs with data centers using grid power?

A:The company is currently focused on providing a comprehensive solution for its customer and is not envisioning breaking up or parceling the allocation at this time.

Q:What capacity factors could older coal-to-gas units achieve if the market tightens, and are additional investments needed?

A:If the market tightens by 1-2 GW, older units would need to run at high capacity factors. Additional investments required would be modest, in the tens of millions, as part of normal sustaining capital. The company is also planning for the 2030s to meet load growth efficiently.

Q:What is the status of Phase 2 discussions with AESO and customers?

A:Discussions with AESO and the government are at an early stage, focusing on encouraging industry development while maintaining reasonable prices and reliability. The company is urging prompt clarity, ideally by year-end or early next year. Customer discussions are focused on planning and meeting needs appropriately.

Q:How is the company managing its carbon credit portfolio, and does it play a role in data center discussions?

A:The company views its environmental attributes as a significant advantage, using them to offset emissions and ensure fleet competitiveness. Carbon credits are monetized and used cost-effectively to meet data center customer needs.

Q:How much allocation did the company receive in Phase 1, and how will it serve the customer?

A:The company has not disclosed the Phase 1 allocation amount but is comfortable with it. The data center will be located at the Keephills site, and the load will be served using the entire fleet, not just Keephills 2. Subsequent phases may involve more unit-specific solutions.

Q:Does the company need Phase 2 clarity to finalize an MOU?

A:No, the MOU finalization does not require Phase 2 clarity. The company has tools to address subsequent staging without needing Phase 2 completion.

Q:Why did the company not pursue buying allocations from others in Phase 1?

A:The company is focused on utilizing underutilized facilities, which it views as akin to incremental generation. This approach aligns with discussions with the government and AESO about meeting data center needs efficiently.

Q:Can the Pinnacle project units be repurposed for data center customers?

A:Yes, the Pinnacle project units can potentially be repurposed for data center customers.

Q:Are Phase 2 discussions with the same type of customers as Phase 1?

A:Yes, discussions are with a singular customer encompassing both Phase 1 and Phase 2.

Q:What is the status of the Centralia project and its potential uses?

A:The Centralia project is focused on serving a singular customer with a coal-to-natural gas conversion for long-term use. The site is also being explored for renewable energy opportunities like solar, wind, or storage, which could serve the same or other customers.

Q:Review of Unclear Management Responses

A:Management avoided directly answering how much allocation was received in Phase 1, citing comfort with the amount but not providing specifics. They also did not provide clear details on why they chose not to buy allocations from others in Phase 1, focusing instead on underutilized facilities as incremental generation.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

TAC Transcript

TransAlta Corporation (TAC) Q2 2025 Earnings Call Transcript

Positive8-1

TransAlta Corporation (TAC) Q1 2025 Earnings Call Transcript

Unknown5-7

The earnings call presents mixed signals. While there are positive elements like an 8% dividend increase and a strong liquidity position, the financial performance shows a significant decline in Adjusted EBITDA and Free Cash Flow, mainly due to lower power prices. The Q&A reveals management's focus on M&A over new projects, but uncertainties around regulatory impacts remain. Overall, the market may react neutrally to these mixed factors, especially given the company's mid-cap status.

TransAlta Corporation (TAC) Q3 2024 Earnings Call Transcript

Unknown11-5

The earnings call reveals mixed signals: significant spot price declines and economic risks in Alberta negatively impact financial performance, but proactive hedging and a strong share repurchase program offer some positives. The Q&A section highlights uncertainties, particularly around emissions and data center opportunities, which could weigh on investor sentiment. The company's market cap suggests moderate sensitivity to these factors. Overall, the sentiment is neutral, as positive shareholder returns and liquidity are offset by market volatility and unclear management responses.

TransAlta Corporation (TAC) Q2 2024 Earnings Call Transcript

Positive8-1

The earnings call reflects strong financial performance with increased EBITDA and free cash flow, despite a challenging pricing environment. The share repurchase program is progressing well, enhancing shareholder value. The Q&A section shows confidence in future opportunities, particularly in renewables and capital recycling, although management was vague on some specifics. Overall, with a market cap of $2.1 billion, the positive financial metrics and strategic initiatives are likely to result in a positive stock price movement in the short term.

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